One of the key components of policy analysis is to figure out when something is a cost savings where there are a net reduction in expenditures from a wide scale perspective on a given activity to cost shifting where the total resources being used for an activity is the same but the contribution of different entities changes. This distinction is important to remember when reading through Avik Roy’s healthcare reform as he primarily engages in massive cost shifting as he has identified as one of his primary objective functions the minimization of federal expenditure in order to minimize high income taxation. That is what he values, and that is what his plan would achieve. There were elements of cost savings (bundled payments, hospital consolidation trust busting) but those were secondary to his primary means of “saving” money. I disagree with his value judgment
When you read any policy analysis or proposal that explicitly states that it is attempting to optimize on a single category of expenditure reduction (in Roy’s case federal) and there is an explicit statement of a five trillion dollar gap between current and proposed, ask whether there are actual cost savings involved, or massive cost shifting:
Over a 30-year period, we estimate that raising the eligibility age for Medicare by four months per year would reduce Medicare spending by $6.6 trillion, with an offsetting increase in exchange-based premium subsidies of $1.5 trillion, for a net spending reduction of $5.1 trillion.
In Roy’s case, it is massive cost shifting he is engaged in. And that is fine, he values low taxes and no services in his moral policy universe. Let us be explicit in what that means though.
Sometimes cost shifting is a good policy as it can lead to a more efficient way of achieving a task. For instance, my two year old likes to “help” Mommy and Daddy sweep. We will give him the broom and allow him to clean the dining room. Once he sees a shiny object or his sister, we’ll take the broom back and sweep the kitchen, the room that needed to be swept. The cots shift of taking the broom out of his hands and into ours produces significant time and thus cost savings as we avert a temper tantrum, get a happy child, and a clean kitchen.
However, there are seldom that many wins that are that easy.
The proposal to increase the Medicare eligibility age by four months per year is a classic example of cost shifting. We have good estimates from the CBO on the federal budgetary impact of raising eligibility age by two months a year to merely age 67. The federal deficit impacts are minimal, as the savings on Medicare are eaten up by increased subsidies for the Exchanges, increased disability payments and increased Medicaid payments plus increased suffering as more people are uninsured:
Looking farther into the future, CBO estimates that by 2038, spending on Medicare would be about 3 percent less under this option than it would be under current law—4.7 percent of gross domestic product rather than 4.9 percent. On the basis of its estimates for 2016 through 2023, CBO projects that roughly two-thirds of those long-term savings from this option would be offset by the increases in federal spending for Medicaid and exchange subsidies and the reduction in revenues described above.
Although CBO anticipates that most people who would lose eligibility for Medicare under this option would continue their existing health insurance coverage or switch to other forms of coverage, the number of people without health insurance would increase slightly. For example, CBO estimates that of the 5.5 million people who would be affected by this option in 2023, about 50 percent would obtain insurance from their (or their spouse’s) employer or former employer, about 15 percent would continue to qualify for Medicare on the basis of their eligibility for disability benefits, about 15 percent would buy insurance through the exchanges or in the nongroup market, about 10 percent would receive coverage through Medicaid, and about 10 percent would become uninsured.
Roy reduces the offsets by decreasing Exchange subsidies by significantly reducing what the subsidy has to buy on the Exchange and shifting long term disablity care for Medicaid to the states. In his world, the federal government would offload most of their expenditures to the group insurance market, or onto the backs of individuals who would go uninsured and thus have a much higher risk of having significantly lower quality of life or possibility of avertable death than they would if they were Medicare enrolled. And since Medicare is cheaper than group health insurance, dumping people back onto the group health insurance market means that the people who receive group health insurance will be eaten up by the increased premiums of employed elderly and near elderly who are then hanging on for their dear lives for Medicare eligibility. (BTW, this is why Medicare buy-in to age 55 was attractive, it removed the oldest and most expensive current cohort from the group insurance market, significantly reducing rates and shifting risk onto the federal government)
And this is only with the two month jump to age 67. Moving to age 75 in four month leaps cost shifts even more aggressively. The biggest difference would be the incentive effect to stay with employer sponsored coverage would be far stronger and far longer plus the very low acturial value of plans that insurance companies would offer to healthy seniors and the absolutely fugly plan designs that would be offered to potentially and actually sick seniors would shift most of the risk and costs of moving away from an effective single payer system to Roy’s Universal Exchange with its attendant low coverage schemas onto individuals.
Sure, it saves the federal government a buck, and it might reduce health expenditures because a $7,000 or $10,000 deductible with a network that doesn’t have a tier 1 doc in the specialty that you need will reduce utilization through fear of bankruptcy and FUD on the customer service phone tree, but suffering is real and it is expensive. But it is not actually saving significant system resources except through increased suffering via foregone treatment or earlier death of poorer seniors who are no longer Medicare eligible, so again, the cost savings are cost shifts to demonetized costs.